Non-Exclusive Dealing with Retailer Differentiation and Market Penetration |
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| Institution: | 1. School of Economics & Centre for Applied Economic Research, University of New South Wales, Sydney, Australia;1. Department of Economics, Finance and Legal Studies, The University of Alabama, 200 Alston Hall, Tuscaloosa, AL, 35487, USA;2. Econonomic Science Institute, Chapman Univeristy, One University Dr., Orange, CA 92866, USA;3. Department of Economics, Clemson University, 228 Sirrine Hall, Clemson, SC 29634, USA;1. University of Bayreuth, CESifo, and CEPR, Germany;2. Faculty of Law, Business and Economics, University of Bayreuth, Universitätsstr. 30, Bayreuth D-95440, Germany;3. University of Munich, CESifo, and CEPR, Germany;4. Department of Economics, University of Munich, Ludwigstr. 28 (Rgb.), München D-80539, Germany |
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| Abstract: | Retailer differentiation exists in most industries and gives manufacturers an incentive to contract with different retailers to penetrate a market. This paper analyzes the impact of this penetration effect on vertical contract exclusivity in an oligopolistic model with differentiated retailers. In the model, manufacturers endogenously choose contract types and negotiate with retailers on wholesale prices. We show that, when the penetration effect is sufficiently strong, non-exclusive contracts lead to higher profits for the manufacturers and retailers. The model is applied to an example with logit demand, which shows that both manufacturers choosing the non-exclusive contracts is a dominant-strategy Nash equilibrium even though they may both be better off under exclusive contracts when the products have high quality or low costs. |
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